AGENCY UPGRADES STATE’S BOND CREDIT RATING TO ‘A’

over time — will likely save taxpayers millions of dollars as the state borrows to build roads and schools.

It is the first time since 2006 that the state’s general-obligation bond credit rating has been raised a notch by Standard & Poor’s, bringing California out of the nation’s credit basement.

It’s a reflection of a more positive outlook for the state’s fiscal health, according to S&P, which noted Gov. Jerry Brown persuaded voters to raise taxes and used that money to help balance the budget.

For California, the move will lower interest payments for more than $82 billion in already sold bonds, as well as for future projects, bringing major, but unspecified savings.

Moreover, California this spring plans to sell another round of general-obligation bonds, which will be sold at a lower interest rate thanks to the new credit rating.

“It’s going to be cheaper to build roads and schools and other public projects,” said Tom Dresslar, a spokesman for the state treasurer.

That’s because the repayment obligation will be trimmed back and the savings will multiply over the years, much like borrowing on a home mortgage loan at a slightly lower interest rate.

“You’re not going to save a lot in the near term, but in the long term it adds up over time,” said Mac Taylor, the state’s nonpartisan Legislative Analyst, who monitors budget issues.

The size of the outstanding debt service is important because the interest takes money away from other essential services, from schools to health care.

S&P gave the state an “A” rating compared with “A-” for the $73 billion in outstanding general obligation bonds. California also received an “A-” instead of “BBB+” for the $9.3 billion worth of sold lease-revenue bonds. Interest rates for sold bonds can fluctuate, and buyers accept that.

The new ratings are still five notches below the coveted “AAA” that makes bonds the most desirable in terms of safety and cost the state much less in interest.

The upgrade leaves Illinois with the lowest rating of any state rated by S&P. The credit rating agency cut Illinois one notch to “A-” last week. Illinois also has the lowest state rating from Moody’s Investors Service, at A2. Moody’s rates California A1.

“This is a well-deserved milestone reached on California’s road to full economic recovery,” said Senate President Pro Tempore Darrell Steinberg, D-Sacramento. “In 2009, California was sitting in a $42 billion hole, but today’s budget is back in black, balanced, and projected to return surpluses.”

In its announcement, S&P pointed to the state’s work to bring revenues more in alignment with spending, from cuts to taxes to paying off debt that carries interest.

“We view the current and proposed budgets as placing the state’s finances on a more sustainable trajectory,” the agency said in its report.

But at the same time, S&P noted several issues “offsetting” the state’s growing economic strength. Among those: a volatile revenue base reliant on income taxes that swing along with the stock market, questions about what the state will do when the November sales and income tax hikes expire, and huge pension and medical liabilities for retired workers.

“We continue to view the state’s budget repair effort as a work in progress,” S&P said. “A central question going forward is whether actual financial performance can match — or at least approach — the outcomes targeted in the governor’s budget proposal and multiple year forecast.”

Moreover, S&P warned that Democrats who control the Legislature must stick to their early mantra of fiscal restraint.

“We anticipate there could be political pressure to restore services that would entail higher costs and could undermine the state’s nascent fiscal balance,” S&P said.

California’s jobless rate was 9.8 percent in December, down from a peak of 12.4 percent in 2010, though still above the 7.8 percent national average, according to Bloomberg News Service.

Meanwhile, the state is on track to collect $5 billion more in tax revenue this month than estimated in Brown’s budget, according to the Legislative Analyst’s Office. The higher rating marks a turnaround for California, which bridged more than $200 billion of projected budget shortfalls in the past decade, according to Reuters.

S&P dropped California to “A+” in February 2009, a year when the state had to issue $2.6 billion in IOUs to pay its bills amid a legislative impasse over how to erase a projected $42 billion shortfall. The following year, the company cut the state to “A-.”